FSA Consults On Listing Rule Changes

by Robin Pilgrim, LawAndTax-News.com, London

31 March 2006

The UK's Financial Services Authority (FSA) on Thursday published a consultation paper on proposed changes to the Listing Rules (LR) for investment entities, and on proposed changes to the Listing Rules and Disclosure Rules to implement the Transparency Directive (TD).

The proposed changes for investment entities will replace the existing regime with a more principles-based approach to determining eligibility for listing. This would enable those employing a wider range of investment strategies, including those currently pursued by some hedge funds, to list in the UK for the first time.

The TD forms part of the EU's Financial Services Action Plan (FSAP) and is designed to enhance transparency across the EU's capital markets by harmonising information requirements across the EU. It requires companies whose shares are admitted to trading on regulated markets to produce periodic financial reports and shareholders to disclose major holdings in such companies.

Hector Sants, FSA Managing Director of Wholesale Business, explained that:

"Our proposed reform of the Listing Rules for investment entities will modernise the UK's regime, providing companies with greater flexibility over their investment strategies, while maintaining strong disclosure-based investor protections. This approach is consistent with the conclusions of our work on Wider Range Retail Investment Products which we announced last week and which we believe is a sensible approach to developments in the investment market."

"The Transparency Directive largely replaces existing UK rules which ensure that a high standard of information is provided by listed companies to the market on a continuous basis. We are asking market participants whether we should implement the directive's minimum requirements or if we should retain key features of the existing UK regime for financial reporting and shareholding disclosures, which currently go beyond the directive's requirements."

The proposed reforms cover two key areas – eligibility for listing (for entities seeking a listing for the first time) and continuing obligations of entities once listed.

The main changes being proposed are:

• To replace the current, rather mechanistic rules, governing what qualifies as an adequate spread of investment risk with a more principles-based approach, which will allow investment entities to have greater flexibility in their choice of investment strategies. It will also remove restrictions on short selling and enable greater use of synthetics;
• To ensure investors remain appropriately protected by: requiring, as a condition of listing, new investment entities to have sufficient working capital for 12 months; and
• Requiring investment entities to state in their annual report and accounts how they are achieving their objectives of spreading investment risk; and to immediately notify any significant changes to their risk profile;
• To remove what is effectively duplication by looking to rely where possible on other relevant regulatory provisions – such as the regimes for authorising fund managers, and for authorising Open-Ended Investment Companies - rather than imposing additional listing requirements;
• To simplify other ongoing disclosure obligations, for example by removing a number of detailed financial disclosure requirements to be included in an investment entity's annual report and accounts regarding portfolio composition; and
• To remove restrictions presently in place on property investment companies, thus ensuring the compatibility of listing rules with tax rules that are to be introduced under the new REITs regime.

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